holiday
23 July 2015 Alternative Risk Transfer

A well-deserved break

As the summer months approached, activity in the insurance-linked securities (ILS) market started to slow, with the majority of issuance being seen in the first half of the year.

However, despite the seasonal lull, Paul Schultz, CEO, Aon Securities, says that he expects to see a slight closing of the gap between last year’s issuance and this year’s.

“We’re in a phase where clients have completed their issuances, but there isn’t an endless pipeline of new deals coming to market. Having said that, we are continuing to structure a significant number of transactions,” he says.

“We expect at least two transactions during the next two months, which might close the gap a little between last year and this year.”

During this time, Schultz says that trading in the secondary market increases slightly, but as activity in other perils such as Japanese typhoon increases, the levels of trading could pick up.

“If we started to see more Japanese typhoon bonds for example, trading might increase between June and August, and the same for European windstorm.”

“We see a slight pick-up in secondary trading over the summer, but as the first half is busy with deals, the market has generally made its investments by this time. A lot of the capital is deployed, so until we start to see more capital in September, it’s fairly quiet,” he says.

“However, if we started to see more Japanese typhoon bonds for example, trading might increase between June and August, and the same for European windstorm. So if there was greater uptake within these perils, it may start to impact the quieter trading times.”

Following trends

Overall, the property reinsurance market has been flat, and this is a trend that is creeping into the ILS market, resulting in a slowdown in growth.

However, this slowdown is expected to facilitate innovation in the sector.

“I think we’ll see more of the hedge fund reinsurer-type transactions as the market grows,” says Schultz, speaking of innovative structures that have emerged within the market. “We saw the launch of Fidelis in July, so I think there will be a pipeline of deals that come to the market.”

Another area which could facilitate growth and innovation within the ILS market is life and health risks which, Schultz says, will grow over time.

“The amount of risk transfer for longevity will increase over time. However, the issue that the market is facing is with regard to the most efficient form of risk transfer for life and health transactions—and I’m not sure that we’ve solved this for both client and investor. There is still work to be done here before this asset class grows substantially,” he says.

The evolution of the market can clearly been seen over the last year, and as the annual Monte Carlo Rendezvous approaches, Schultz says that getting re/insurers to engage with alternative capital will still be high on the agenda.

“Last year our theme was trying to refocus the discussion around alternative capital as a means to facilitate growth and not necessarily replace a certain type of existing strategy,” he says.

“Over the last nine or 10 months, I think we’ve scratched the surface, but there are certainly still ways for re/insurers to engage this capital for growth.”

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